The Doom Loop

The Doom Loop:

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The Doom Loop.

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We’re in one right now.

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The Fed is screwed.

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There’s no way out.

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Whatever decisions they make in the next few years will be bad.

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Asset prices are about to get crushed with interest rates are where they are.

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That means business failures, people losing jobs and millions going unemployed.

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They’ve said they’re going to let that happen to get inflation under control.

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That’s the choice they’ve made.

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Or so they say.

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Instead, they’ve chosen to print in an inflationary environment.

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Let me explain.

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Most transactions in the last 75 years since World War II have occurred in US dollars.

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Why?

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The US had the global reserve currency.

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It was the most trusted after the Bretton Woods Conference in 1944.

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They also strengthened it with the Petro Dollar.

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Agreements they made, specifically Kissinger, with gulf nations in the 70s.

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All the oil nations would sell their oil in US dollars in exchange for defense and military aid.

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The best military in the world guarding you in the 70s probably made sense.

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It doesn’t today.

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So when countries transact with each other, they need dollars.

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Dollar supply was always needed by the world.

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Everyone needs dollars to do business.

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What does that mean?

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It means the US had the ability to print unlimited money.

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Why?

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Because demand was always there.

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Foreign governments and businesses always needed US dollars to do business.

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But now the demand is not there.

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People don’t want to buy US debt.

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Why should they?

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Democrats and Republicans have blown the budget.

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Trump did it by cutting corporate taxes but didn’t increase rates and didn’t cut spending.

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Biden ramped it up with the Built Back Better multi-trillion dollar stimulus bill.

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That was debt taken out when rates were ~0%.

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Now they’re 5%.

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Interest expense is about to surpass defense spending and Medicare.

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That’s horrifying.

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The entire global monetary system is built on this dollar.

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And the ability to always have supply to transact globally.

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Now the Federal Reserve is restricting dollars.

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Or so they say with QT.

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Turns out they’re lying.

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They’re just hiding their QE in other ways.

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See the Reverse Repo Market.

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And the BTFP.

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Trillions of dollars supplied to the banks to keep them alive.

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Valuing bond prices at par when they’ve fallen almost 50%.

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The US bond market is in the worst bear market EVER.

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Who owns US bonds?

EVERYONE.

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Global central banks.

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Commercial banks.

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Pension funds.

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Everyone.

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And the value of those bonds are 50% less today than they were a year ago.

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That’s significant.

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US treasury bonds are supposed to be golden collateral.

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They backstop the global monetary system.

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And now no one wants them.

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It’s not only that they don’t want them, but it’s also that countries are dumping them.

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Why?

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Because they need to defend their currency.

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This is where Japan enters the picture.

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This video by Peruvian Bull is a must watch.

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Most Westerners don’t understand how significant Japan is in the global economy.

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They own tons of US debt.

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And have basically been running yield curve control for decades.

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What does this mean?

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It means they cap yields.

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So the yields on their debt never went above 0.5%.

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If they did, they printed their currency to protect it.

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But recently they changed their policy.

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Their letting yields rise.

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What happens?

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It means they’re releasing some of the bonds through their currency.

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It’s inflating.

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So to defend their currency, they have to buy it on the open market to create demand.

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How do they do that?

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Sell US treasury bonds.

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What happens when they sell treasury bonds?

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Yields go up.

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As treasury bond yields go up, more people and countries start to go bankrupt.

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Like I’ve written before, America will suffer but other places will be worse.

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But we’re now hitting breaking points.

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We’re in the doom loop where no one has any good choices.

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If the Fed keeps rates high with inflation this high, we enter a stagflationary lost decade.

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If the Fed cuts rates, inflation will run off.

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Then watch revolutions and the cost of everything rise quickly, especially in developing countries.

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If they keep increasing rates, they increase the cost of their debt.

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Right now their debt is unaffordable.

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They’ve been drunk on free demand and liquidity for decades.

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American politicians don’t understand how powerful their currency is.

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The power they’ve yielded over the world for generations.

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That won’t last forever.

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Countries are already moving away from it.

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There’s a reason more countries are applying to be a part of the BRICS nations.

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There’s a reason trade deals are getting done in other currencies.

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There’s a reason oil is getting traded in other currencies.

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It means the dollar loses power.

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Countries don’t need as much of it anymore.

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That means demand for dollars decreases.

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That’s bad for America.

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So who’s gonna buy the debt?

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The Fed.

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How are they going to do it?

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Print the money.

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I don’t envy the Fed.

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Or some people in power like Jerome Powell and Janet Yellen.

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Given policies and decisions for the last 30 years, they’re left in impossible situations.

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There is no good way out.

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It will be painful.

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It will be hard.

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There will be lots of conflict.

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It’s just starting with Ukraine/Russia and Israel/Hamas.

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Remember, war is good for business.

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Ask the American military-industrial complex.

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Who have dominated American foreign policy for generations.

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Eisenhower warned the world about them in the 50s and nothing has changed.

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Factors outside the Fed's control are also contributing to this problem.

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Under investment in natural resources in the last decade.

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Ongoing labour disputes for higher contracts.

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Deglobalization.

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The shift to green energy.

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Onshoring.

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The US Strategic Petroleum Reserve at its lowest in 40 years.

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All these are inflationary.

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As history has taught us, inflationary decades are hard.

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This decade will be hard.

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Genuinely hope we make it.

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Because we’re in a doom loop with no way out.

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So what can you do?

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Get educated.

Learn.

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Focus on the moment.

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Focus on what you can control.

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Don’t watch the news.

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Don’t focus on the negative.

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Don’t worry about things outside your control.

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Gold, commodities, hard assets and good companies with no debt, solid MOATs and good cashflow are things to own (*wink Gamestop*).

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Stocks and bonds, not so much.

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Stay vigilant.

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Don’t fall victim to your phone and propaganda.

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It will be rampant trying to politicize and divide opinion.

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Love those around you.

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Support them.

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Be there for them when times are difficult.

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What am I doing?

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Educating myself and the world as much as possible.

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All I’m doing is trying.

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Trying to navigate the world.

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Trying to do my best.

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Trying to foresee what’s coming.

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All I see is we’re in a Doom Loop.

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